The Lesson of Enterprise Value for Valeant Pharmaceuticals Intl Inc

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A quick glance at its chart will tell you that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is a bargain. But beware. As fans of Star Wars will tell you, it’s a trap. Click over to VRX stock’s balance sheet. Look at the total debt and its relation to the assets.

The Lesson of Enterprise Value for VRX Stock

Valeant stock is not now, nor has it ever been, a bargain stock. When you add the debt of $28.6 billion to the market cap of $4.3 billion, you’re looking at a $33 billion company that should have $9 billion in annual sales this year, mostly from Bausch + Lomb, the eye care company acquired in 2013, and it could have less if it keeps selling subsidiaries.

When you buy Valeant, you buy its debt as well as its equity.

It’s All About VRX Stock’s Debt

To put Valeant stock’s valuation into perspective, compare it to a healthy company in the same industry, like Merck & Co., Inc. (NYSE:MRK). Merck has a market cap of nearly $180 billion, about $25 billion in debt, and revenues of about $40 billion. It is not selling subsidiaries to stay afloat.

The enterprise value relative to sales of Merck comes to about 5. The enterprise value relative to sales of Valeant is about 3.5. Valeant’s is lower, but not by enough to compensate for the fact that, unlike the equity holders, the debtors must be paid.

This is sad because the hard-working people at Valeant subsidiaries are doing some good things.

For instance, Bausch + Lomb recently launched a contact lens in Europe for people with astigmatism, called ONEday. I have astigmatism. ONEday is a good thing. The dermatology unit recently launched a new psoriasis drug called Siliq, which competes with Taltz from Eli Lilly and Co (NYSE:LLY). Competition is good for patients. Siliq is said to completely eliminate visible skin plaque.

But it really doesn’t matter. Traders who are betting on the VRX stock price to fall have been about the only people making money off Valeant in 2017.

Our Chris Tyler, while acknowledging ongoing efforts by Valeant stock to improve its credit rating, like the recent sale of iNova to private equity for $930 million which let it retire $1 billion in debt, still wrote on October 5 that the only way to play it would be with a strategic spread trade, one that is presently out of the money.

Scams Don’t Pay for VRX Stock

I have been trying to make a bull case for VRX stock all year. From April through July, the VRX stock price made one valiant rally attempt, from $8.50 per share to $18, but it has since fallen back to $12.50 per share, down 14% for the year.

I called it a “dead drugmaker walking” right before the run-up, then sought to make a bull case in June and called it sustainable in July.

I should not have wasted my time, or yours. The fact is that VRX stock profits were always based on buying drug companies with debt, destroying their pipelines with budget cuts and raising the products’ prices, then moving the profits overseas. Wash, rinse, repeat.

This is the strategy former CEO Michael Pearson set in motion upon taking control of the company in 2008. It’s the strategy that attracted hedge fund titan Bill Ackman.  It wasn’t just “flawed.” It was a scam.

Yet Pearson bragged about this “strategy,” loud and long, to anyone who would listen during Valeant’s go-go years. An investment case based on manipulating a market will always end in tears. Don’t cry for VRX stock. Just avoid it.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/valeant-pharmaceuticals-intl-inc-vrx-stock-enterprise-value/.

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